Monday, January 3, 2011

The Story of AIG and the Canadian Government


The Canadian Press has awarded Jim Flaherty the Business Newsmaker of the Year honours for his handling of the economy. "With Flaherty at the helm, Canada's economy outperformed most others last year."

But in a case of what you don't know won't hurt you, I would say that if Canadians really knew what was behind the appearance of a strong recovery in Canada, they might want to make Flaherty the most high-profile Canadian prisoner of the year, because his actions since taking over in 2006, have been criminal.

He's been lauded for keeping a cool head, but there is a big difference between a cool head and not giving a damn. Flaherty falls into the last category. I think when he's finally out of office it will be worse than when he left the Ontario cabinet, and an enormous deficit was found under his desk.

Because what Flaherty has been doing, even when our economy was strong and his government inherited a 13 billion dollar surplus, was to gamble away our future. We've had incompetent governments before, but this is the first to systematically tear down decades of financial infrastructure, put in place to protect our ability to take care of our citizens.

I've already mentioned the sub-prime mortgage mess that he's gotten us into. You can read about it here, here, here and here. But what he's done is actually worse, if that's possible. But first a bit of history.

The Story of AIG

The American International Group, Inc., or AIG, has been in business for almost nine decades, and rose to the top under the leadership of Maurice R. "Hank" Greenberg, "who shifted its focus from personal insurance to high-margin corporate coverage. [Greenberg also] focused on "selling insurance through independent brokers, rather than agents, to eliminate agent salaries." (1)

And the company prospered by following government regulations and maintaining a cautious approach to investing. But while deregulation of the industry began before George W. Bush, his administration virtually turned Wall Street into the Las Vegas strip and AIG took the bait.
Deregulation mania raged .... liberating every corner of the American financial industry from what were patently sensible regulations aimed at protecting the public from reckless bankers, speculators, hucksters, and just the blind stupid greed of the herd on a rampage. Deregulation can't simply be chalked up to the alleged imperatives of globalization or the existence of freer financial markets offshore.

There were international efforts to rein in the financial anarchy, but instead of joining them—even taking a leadership role—the U.S. government actively resisted attempts to bring order and caution to the markets. When the European Union tried to bring the foreign operations of Americas five big investment banks under stricter European regulations in 2004, the Bush administration helped ward off such interference, siding with the banks' request to be left alone to decide how best to regulate their own risky behaviour. (2)
And that risky behaviour resulted in the worst economic crisis since the Great Depression. Some gamblers made a lot of money betting on the crash, but AIG self-destructed.

The American Taxpayer to the Rescue

After telling the government that AIG was too big to fail, the federal reserve began bleeding money to beleaguered corporation. A total of 170 billion dollars. The largest bailout in American history.

You might think that given the generosity of the American taxpayer, that AIG would be grateful and try to show their appreciation by doing a better job of managing their company. Not on your life. They continued to operate as if nothing had happened. They were "victims" who needed rewards.

- The week following the September bailout, AIG employees and distributors participated in a California retreat which cost $444,000 and featured spa treatments, banquets, and golf outings.

- A month after the first bailout, AIG executives spent $86,000 on an English hunting trip. The company responded by saying, "We regret that this event was not canceled."

- And yet on November 10, 2008, just a few days before renegotiating another bailout with the US Government for $40 billion, ABC News reported that AIG spent $343,000 on a trip to a lavish resort in Phoenix, Arizona.

The American taxpayer is suffering, in part because they had to clean up AIG's mess, and the company is flaunting a lavish lifestyle, financed by the suffering American taxpayer. But it doesn't end there.
In March 2009, AIG announced that they were paying out $165 million in executive bonuses. Total bonuses for the financial unit could reach $450 million and bonuses for the entire company could reach $1.2 billion. President Barack Obama, who voted for the AIG bailout as a Senator responded to the planned payments by saying "It's hard to understand how derivative traders at AIG warranted any bonuses, much less $165 million in extra pay. How do they justify this outrage to the taxpayers who are keeping the company afloat?" (1)
Good question. And yet they do. This new culture of greed and entitlement, while a nation suffers as the result of their "risky behaviour" is frightening. What have we created?

Jim Flaherty and AIG

When Jim Flaherty threw the doors open to high-risk mortgages in Canada, with his first budget in 2006, he allowed the American high-risk industry to get a foot hold.
“In the U.S., they are still responding to the fallout of the subprime mortgage mess. In Canada, we acted early over the past year,” Mr. Harper said in a speech to the Empire Club in Toronto. He didn't say that, not only did his own government open the sheltered Canadian mortgage market to U.S. insurers, but it also doubled to $200-billion the pool of federal money it would commit to guarantee their business. The foreigners unleashed what one U.S. insurance executive described as a fierce “dogfight for market share” that prompted rivals, including the giant federal agency Canada Mortgage and Housing Corporation, to aggressively push such risky U.S.-style lending. (3)
And one of those companies that Flaherty and Harper aggressively wooed, was AIG.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion. Twenty-four hours before Mr. Flaherty's announcement, AIG's mortgage subsidiary first registered with Canada's lobbyist commissioner, according to a federal registry. At the time, companies who spent more than 20 per cent of their time lobbying the government for changes in policy were required, by law, to register. It is not known how much time AIG spent promoting its cause to the government.

... Banking and insurance officials were so concerned about the alarming rush to 40-year mortgages at the beginning of 2008 that one bank executive warned the Bank of Canada's chief financial stability officer, Mark Zelmer, in a meeting that “the government has got to put an end to this.” (3).

And just so we're clear. AIG and other American firms, can insure questionable mortgages in Canada with absolutely NO risk to themselves. The only ones assuming the risks are the Canadian taxpayers.

And when news of the crisis first hit, Flaherty simply transferred all of the high-risk mortgages from the banks' books, to ours. We now own them and if they default, guess who's left holding the bag? The Canadian taxpayer. Now comrades of the American taxpayers, who have transferred enormous amounts of money to AIG, but got only a bunch of rotten paper in exchange.

And make no mistake. Forclosures in this country, while harder to track, are on the rise. And there are vultures circling hoping to cash in.

AIG and the Bank of Montreal

Another controversy arising in the U.S. over the AIG bailout, is that they paid off their bankers first, before compensating shareholders or the American public. And one of those bankers who had given AIG money to help create the sub-prime tsunami, was the Bank of Montreal, who received 200 million dollars of American taxpayer money.

And guess who recently purchased a portion of AIG in Canada? You guessed it. The Bank of Montreal. We got their garbage and AIG got our money. Good job Mr. Flaherty.

$200 billion to feed our finance minister's gambling habit. And what does our media do? Give him an award. It's much easier than doing their homework, I suppose.

Some might wonder why the opposition is not having more to say about this impending disaster. But when a Globe and Mail reporter asked then Liberal finance critic, John McCallum about it, he said that no one wanted to be responsible for the crash of the housing market.

So, instead, everyone has to go along with the charade. Absolutely frightening.

Sources:

1. Wikipedia

2. The Trouble With Billionaires, By Linda McQuaig and Neil Brooks, Viking Canada, 2010, ISBN: 978-670-06419-9, Pg. 64

3. Special investigation: How high-risk mortgages crept north, By Jacquie McNish and Greg MacArthur, Globe and Mail, December 12, 2008

3 comments:

  1. Let’s review a few current events you may have heard of. Like 50,000 students marching in London yesterday, trashing buildings, protesting an austerity budget in Britain which will triple tuitions. And, of course, help diddle the middle class as that country tries to stave off a deficit hell. In Ireland, rumours the IMF will be rolling in any day helped drive national bond yields to a stunning 8.76%, or a premium of more than 6% over similar German bonds. At that price, Ireland can’t even afford to issue any.

    In Washington Obama’s blue-ribbon panel on how to rescue America has proposed $3.8 trillion (yeah, with a ‘t’) in spending cuts. It would hack payments to those useless old people (seniors, as they’re known) and the unproductive slackers in society (called the sick), as well as ending mortgage-interest deductibility – guaranteed to make the housing crisis last forever.

    Capital gains would no longer get a tax break (bye-bye stock market), child care would get no break and the retirement age (for reduced benefits) would eventually soar to 69 years. “This country’s out of money and we better start thinking,” said the commission’s head. “Without tough choices, we’re on the most predictable path toward an economic crisis that I can imagine.”

    In Canada the prime minister announced days ago he’s going on a listening tour across the country before we get a ‘tough love’ budget from the elfish little heartthrob, F. Recently, as you know, sixteen million Canadians just got HST’d, while a few million others had their sales tax rates increased. The government will spend $55 billion this year it doesn’t have, much of it on stimulus programs which seem not to have worked.

    Households here are the most indebted ever. Mortgage loans now total over a trillion dollars. Canadians used their houses like ATMs last year, taking out $41 billion, much of it to live on and pay debts. We owe $1.46 for every dollar earned. And, by the way, has your salary increased lately?

    Welcome to the next few years. Deflation will lick at our heels, our jobs and our houses. The US Fed can spend all the money it wants, but it will likely just make the situation worse – deepening debt without firing up the North American economy. It’s a world in which the last thing smart investors will do is make a single bet – on stocks, on houses or on gold. This is the time for defensive moves, a balanced mix of assets, tax avoidance and liquidity.

    Maybe it’s not the time to be flogging a $457,000 house for $624,900.

    But, like I said, most people don’t get it. They think inflation. Can’t fathom what’s coming. Don’t understand the wealth destruction to occur.

    They challenge me all the time on this, pointing to continued high real estate values as proof my best-before date was decades ago. Of course it was. Ask my wife. But that won’t change what I’ve told you many times – falling sales levels are far more telling than eroding prices. It’s all you need to know.

    But wait, here’s Nobel Prize-winning economist Paul Krugman, writing in the New York Times. He just plagiarized me:

    “So the news that the U.S. housing bubble is over won’t come in the form of plunging prices; it will come in the form of falling sales and rising inventory, as sellers try to get prices that buyers are no longer willing to pay. And the process may already have started.”

    Actually, he wrote that in 2005. Learn history. Or repeat it.

    http://www.greaterfool.ca/2010/11/10/duh-2/

    ReplyDelete
  2. How could CP not know this, Emily? I'm shocked. I remember when CP was trustworthy - if a story came over the CP wire, it was good to go.
    And the Liberals going "along with the charade" so they won't be perceived as responsible for the crash of the housing market?
    O Canada, I hope 2011 sees some responsibility in Ottawa.

    ReplyDelete
  3. When my aunt dies in the mid 1990 I inherited a large sum of money and stocks. The oil stocks I got rid of real quick (at a loss) but my conscience felt good) and the second was AIG, which I sold a year later. The money that I didn't lose on AIG more than made up for any losses on the pipeline stock..which proved to me if you don't believe in the company don't support them by owning their stock...money can't buy happiness...Great read as usual Emily

    ReplyDelete